Paranoia over UK property prices is now so great that the merest blip is seized upon as evidence that the housing market is finally heading for the long-anticipated crash.
This paranoia extends to Scotland where figures from website Myhouseprice.com suggesting a 3% drop in prices to an average £110,388 between February and April have caused a stir.
Dan Cookson, a partner at Myhouseprice.com, which crunches data from the Registrars of Scotland, struck the match by claiming that “if we have another month where the figures drop, it will be a critical indicator”.
The Scotsman then fanned the flames by scaring its readers with the views of a triumvirate of property crash Cassandras – fund manager Tony Dye, Roger Bootle of Capital Economics and the National Institute of Economic and Social Research.
So is Scotland really one month away from disaster? Speak to people on the ground – namely mortgage brokers and estate agents – and you will find a rather more relaxed view prevails.
The Scottish property market has certainly enjoyed a rip-roaring time over the past year with average annual growth touching 22%. Edinburgh remains the priciest city with the average property costing £139,859, while a two-bedroom flat in the desirable suburbs of Marchmont and Bruntsfield will set you back £204,976.
Behind the headline 15.8% growth in the 12 months to April the rate of increase in Edinburgh has fallen for the third quarter in succession according to the Edinburgh Solicitors Property Centre. But chief executive Ron Smith says that despite the slowdown there is still “definitely heat in the market”. Rising interest rates and the failure of salaries to keep pace with property prices will eventually force a slowdown but this isn't happening yet. “The strength of Edinburgh's market continues to ripple outward with substantial price increases recorded for West Lothian, Fife, Falkirk, Clackmannanshire and Stirling,” adds Smith.
“Looking ahead, there's every reason to be confident of further increases. This is a buoyant market.”
And Paul Santos, marketing manager at Scottish packager Capital Mortgage Connections, says the market remains “crazy, absolutely crazy”, particularly in the major cities and he still can't see any sign of an impending crash. “Four years ago, you could have got a one-bedroom flat in Edinburgh for £50,000. Now you might pay £110,000. Nobody could have imagined this.”
He says three factors should sustain the Edinburgh property market. “It is the capital city, a popular student town and there is a shortage of properties. Unless you are bidding, say, £135,000 for a £115,000 property you are wasting your time and the cost of your survey.
“The market can't rise like this forever. It has to slow at some point but this is not the time to panic. Interest rates will have to rise much further than they have done.”
But the real hotspot is central Scotland, between Edinburgh and Glasgow, where the average property rose 31% to £96,974. This suggests that Scotland is now following a similar pattern to England with the priciest areas topping out while cheaper areas play catch-up.
Alistair Lafferty, broker at Motherwell Mortgages, has witnessed this first hand. “The real buoyancy can be found in the M8 corridor between Edinburgh and Glasgow. Three-bedroom detached houses in Motherwell, Airdrie, Livingston and Bathgate are going for up to £180,000, while four-bedroom homes fetch £200,000.”
He is arranging 80% more buy-to-let mortgages than just a few years ago as second-time buyers increasingly hang onto their flats rather than selling up. “Homeowners who would never have dreamed of becoming private landlords are doing so now because they think it's easy money. And maybe it is, provided the market keeps growing.”
Lafferty says the rental market must saturate at some point but even if it does he doesn't expect a crash. Like many brokers he boasts that Scotland has never suffered negative equity.
“We are still a canny bunch up here. Brokers are reluctant to recommend buy-to-let unless the borrower has enough to cover voids indefinitely, and are cautioning buyers against investing at the top of the cycle.”
Michael Luck, managing director of estate agents Slater Hogg Howison, says a cooling at the top end of the property market – namely £500,000-plus homes in the suburbs of Glasgow and Edinburgh – has been balanced by a strong buy-to-let and first-time buyer market.
First-timers face fewer affordability problems in Scotland than in England where 80% of towns are now beyond their pockets, but their troubles are worsening. More than half the towns in Scotland are now unaffordable according to Bank of Scotland, with Edinburgh, Helensburgh, Stirling, Cupar and Stonehaven the priciest of all. The typical first-time buyer north of the border is now 36 years old and is putting down a £11,000 deposit for a £70,000 flat or maisonette.
Luck says first-time buyers in Glasgow, where the average property costs £103,666, are keen to get on the ladder before they are priced off the lowest rung for good. “They can afford to buy in Paisley which has easy access to the city, and demand is moving further down the Clyde to Greenock which is commutable. You can still buy a two-bedroom semi in Lanarkshire from £100,000.”
Grangemouth, Lochgelly, Bellshill, Irvine and Coatbridge are the five most affordable towns for first-time buyers but these are rapidly getting pricier. The ESPC quotes a three-bedroom detached villa in Grangemouth on the market for three weeks at offers over £82,000 eventually selling for £105,079, 28% more than its 'offers over' price.
Shane O'Riordan, general manager of group economics at HBOS, says opportunities for new buyers are shrinking. “Affordability is clearly becoming an issue for first-time buyers in Scotland – and one that shows no sign of abating in the near future.”
The problem isn't confined to the cities. In the countryside, a 40% rise in the value of properties and the Right to Buy scheme is forcing families to live in caravans and even boats, according to a recent conference given by the Rural Housing Service. Young people and those on low incomes are now priced out of the market, and new housebuilding will take 20 years to address the problem at current rates.
This is likely to prove an enduring problem because few see Myhouseprice.com's recent figures as anything more than a blip. Bank of Scotland, for example, says housing market fundamentals remain strong, prices are steady, and the most that will happen is a cooling off later in the year.
A property slump is unlikely while the economy and employment both remain strong. Commercial property adviser GVA Grimley Scotland predicts a healthy 1% employment growth this year with growth outstripping England during 2005 and 2006.
Bank of England interest rate increases have so far done little to curb demand, says broker Bill Moncrieff, director of Clarkson Hill Mortgage Company in Edinburgh. The 0.25% hike in May did temporarily slow new mortgage and remortgage business but then it picked up stronger than before. “Rates would have to rise at least a further 0.5% to slow things down but I don't see any property meltdown whatsoever – in fact, I expect the market to continue growing,” says Moncrieff.
The pensions crisis has further fuelled demand with people investing in bricks and mortar to plug the savings gap. Moncrieff has seen a 14% rise in buy-to-let business in the past 12 months. “More than ever, the Scotsman's home is his castle.”
He counsels his first-time buyer clients against overstretch. “Young people are struggling to get a foothold but we are encouraging them to save for a deposit rather than stretch to a 100% mortgage and leave themselves exposed if rates rise further.”
Crawford McCaughie, senior lending manager at Dunfermline, says high prices are sparking a flight from the city centre with owners cashing in their flats to buy detached homes in cheaper locations and new buyers forced out by lack of affordability.
“If you sell a two-bedroom flat in Edinburgh or Glasgow for between £150,000 and £200,000 you can buy a nice detached property in Dunfermline and Stirlingshire,” he says. “People are now willing to commute up to 40 miles to the city, which may not seem much to someone living in the South-East of England but it's a lot for Scotland.”
Buyers may be stretching themselves to get a start but lenders are taking few risks. The 'offers over' housebuying system (see box above) gives them a degree of protection they don't have south of the border.
“We lend against the valuation rather than the final selling price. This means if a property valued at £100,000 sells for £115,000 we still only lend a maximum of £95,000. So the property would have to fall to £20,000 before we could take a hit. In England, the difference between valuation and what the buyer pays is much narrower which means more risk for the lender,” McCaughie says.
Bill MacDonald, proprietor of the Aberdeen Mortgage Bureau, says the offers over system means buyers with a £30,000-plus deposit may still have to take a 100% mortgage to secure their property. “So the market has to rise a reasonable amount for them to get back the money they put in,” he says.
And if prices did slump, sellers might have to offload their properties at less than valuation price. This might sound like a recipe for negative equity but MacDonald doesn't anticipate problems. “Mortgages are still cheap despite recent interest rate rises, and demand remains healthy,” he says. “I don't expect a soft landing for the Scottish housing market because I don't expect a landing at all. My clients aren't concerned and neither am I.”
Aberdeen, of course, has its own micro-economy built around oil. While the world anxiously watches oil prices rise, locals are rubbing their hands because this gives an added financial incentive to drill for new deposits in areas where oil is costly to extract, hopefully sustaining the regional boom.
Demand for property is strong, adds MacDonald. “Developers are clearing the Grampian TV Centre in Aberdeen to build two-bedroom apartments. So far, 19 have been snapped up for more than £300,000 even though they haven't finished demolishing the site.”
The young, transient and often well-paid local working population also sustains a healthy buy-to-let market. High prices are rippling out from Aberdeen. In Banchory, 15 miles away, locals are witnessing the increasingly familiar sight of buyers camping out to secure new executive homes.
Inverness too has witnessed desperate housebuyers queuing for days to buy an apartment in a new development in Holm Park. Inverness is the fastest-growing city in the Highlands but developers and planners are squabbling over who is to blame for the lack of affordable new housing. MacDonald admits the market buoyancy has left him baffled.
“Inverness has no real industry and the two oil platforms have closed so I don't know what is driving the market. Perhaps it is simply that more people want to live in the Highlands. Rural areas nearby are also booming.”
Despite the different housebuying systems, lenders offer the same mortgage products on both sides of the border. Dunfermline offers its products to buyers in England, while Market Harborough is targeting business growth north of the border.
Chief executive Philip Dearing says English lenders have to gear themselves up for the different legal system. “We have a separate business within the business that deals with Scottish counter-parties including valuers, solicitors and packages. This gives us credibility among brokers in Scotland, provides a faster service, and allows Scottish housebuyers to access the best mortgages from the English market.”
Market Harborough is developing a product exclusively for the Mortgage Intermediary Alliance Scotland. “Several years ago we decided to push for web-based mortgages and now 37% of our total mortgage applications arrive online,” says Dearing. “The percentage of intermediary applications has fallen from 76% to just 15% over the past eight years. This means it doesn't matter where the borrower is. We are getting applications from Galashiels to the Orkney Islands.”
Market Harborough has always offered mortgages in Scotland and has never suffered a single late payment, any mortgage arrears or a repossession. This positive experience should encourage those who fear the Scottish property market might have finally overreached itself.